Thursday, October 02, 2008

Small Businesses Frozen by Crisis

From the New York Times:

Small businesses in America — the 27 million companies employing fewer than 500 people and in most cases fewer than 20 people — account for half of the nation’s output. A downward swing, whether caused by expensive borrowing or pessimism, could weaken the economy and shrink employment. Small businesses employ 40 percent of the work force, the Census Bureau reports, and they outpace large companies in generating new jobs.

“Small businesses are sitting on their hands,” said Chad Moutray, chief economist of the Small Business Administration. “Either they can’t get the capital or they don’t want the capital. They read what is happening, and frankly they are scared.”


That sense of bracing for harder times is evident in little ways, at companies large and small. George Wendt, the owner of Chicago Metal Rolled Products, which forms steel into supports for stadium roofs, school gymnasiums, large canopies and the like, has reduced the steel he keeps in inventory over the last month, buying only what is immediately used.

That decision, multiplied across many companies, means suppliers will make less and stockpiles will shrink. There will be less production to drive the economy.

More here.

The complexities of economics can make understanding what's at stake in this credit crisis, or mortgage and lending crisis, or financial crisis, whatever you want to call it, seem daunting. That's true enough. But when you get down to it, the basics are pretty simple.

Here's a little history.

Deregulation mania, pushed for a couple of decades by the rising, and then dominant, Conservative Movement, resulted in the repeal of Depression era banking regulations which made it possible for banks to issue home loans to people who couldn't possibly afford to repay them. Those banks then sold the loans to brokerage houses which then packaged them together into larger units, and sliced them up into shares which were then bought by legitimate investment companies.

Quick aside: if you're wondering why bad loans were considered to be a good investment by legitimate investors, you're in good company. The only explanation I've heard is that these investors expected the real estate bubble to expand for a much longer time than it actually did. Yeah, I still don't get it. Maybe they thought that increasing collateral value meant that they weren't actually bad loans. Suffice it to say that being a capitalist doesn't necessarily correlate with possessing intelligence or foresight.

Anyway, it turns out that, even though not every brokerage house and bank was in on the game, just enough were that when the foreclosures began, it sent serious shock waves throughout the entire financial sector: all these companies loan money to each other, sell each other various securities; if you get a certain percentage of them going belly up, it fucks over everyone. That is, one company's inability to pay its debts affects lots and lots of other companies, which in turn are unable to pay their debts because they were depending on that first wave of insolvent banks to pay their fucking debts. Big house of cards caught up in a chain reaction from hell.

We had this all figured out back during the 1930s, and had a lot of laws and regulations designed to keep such cross contamination from bringing the house down, but such thinking was incompatible with right-wing free market ideology, the same sort which dominated business and politics before the 30s, and so it had to go.

Bottom line here: banks are now afraid to loan money to other banks, which means that available money for loans to consumers and non-financial businesses is hard to come by. That's bad because businesses, especially small businesses, depend critically on access to credit or loan money.

Like banks, at any given moment, virtually all businesses don't actually possess in liquid cash what they're worth. They're waiting for payment for services rendered or goods sold in order to pay off obligations like payroll or previous loans. I mean, they've got the money on paper; they just don't have access to it until they get paid what they're owed. In the meantime, however, life goes on, and they have to pay what they owe. That's where credit comes in. You get some loan money to make it through normal expenses until your accounts have been settled. The whole fucking economy works in this way. Credit literally greases the wheels of capitalism.

But what happens when you can't get that credit to make payroll or service your own debt or do any number of things that businesses need to do in order to remain viable? You cut expenses. You lay off workers. You produce less. You find as many corners to cut as possible. Now picture all businesses having to do that. You don't simply have an economic slowdown; you have reverse growth, a.k.a. recession, with high unemployment, soup lines, etc.

This financial crisis is very real. It's not simply about a bunch of fat cat Wall Street assholes. The popular resentment against bailout is one that I understand and sympathize with. Why reward rich pricks in suits who would just as soon sodomize your grandmother as have a hamburger? Thing is, without a massive capital infusion, taking care of the insolvency mess left behind by all those shitty mortgage securities, to make all these nervous bankers feel like it's safe to loan money again, things will just keep getting worse; small business, and then later big business, will just keep slowing down, which will in turn result in mass layoffs, which will in turn result in street riots and social instability the likes of which no living American has seen in his own country.

The problem as I see it is crafting a bailout that fixes the system without rewarding the assholes who broke it in the first place. We also need to make sure this doesn't happen again. We also need to provide relief to all the consumers, who I prefer to call citizens, who've been caught up in this storm's wake. Congress is moving in that direction - praise them all for rejecting Paulson's first "free money for assholes in suits" proposal - but they're not there yet.

If we're lucky, they will be soon.